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Matthew Hutton MA, CTA (fellow), AIIT, TEP, Editor of Monthly Tax Review, highlights some topical capital gains tax issues affecting trusts.

Matthew Hutton

Context

The following were among some interesting points made at the 7th Annual LexisNexis Tolley Tax Planning with Trusts Conference 2007 in London on 16 May 2007.

CGT: Trustee residence

Professional attention is being focused on new s 69(2D) REPLACE ed into TCGA 1992 by FA 2006, with effect from 2007/08.  A trustee who is not UK resident is to be treated as UK resident ‘at any time when he acts as trustee in the course of a business which he carries on in the UK through a branch, agency or permanent establishment there’.  The worrying point is that it may not take very much to constitute a branch, agency or permanent establishment in the UK.  Consider, for example, a multi-national group, with a UK company.  If office facilities are made available by the UK company to the employees of foreign sister subsidiaries which are trustee companies, could use of that facility, even occasionally, make that non-UK company UK-resident?

[Giles Clarke noted that discussions with HMRC on this point are ongoing.  The corresponding income tax provision is in ITA 2007, s 475(6).]

Hold-over relief: settlor-interested trust restrictions from 10 December 2003

The claw-back charge under TCGA 1992, s 169C applies so as to bring into charge a held over gain if within six years after the end of the tax year in which disposal takes place the settlement becomes settlor-interested.  This could apply where the settlor acquires a dependent child in this period and the terms do not preclude him or her from benefiting while dependent. [Equally, as I have pointed out, the claw-back could kick in if a beneficiary becomes a settlor by contributing bounty to the trust fund: there is neither a de minimis nor a pro rata rule.]

Sub-fund elections

The possibility of creating sub-funds solves a traditional problem.  The first beneficiary to take absolutely would get the benefit of all unused losses on the notional disposal under TCGA 1992, s 71(1) – subject always to the restrictions for land.  Further, the losses of one group of beneficiaries would have been netted against the gains of another.  The use of sub-funds can achieve some form of equity in preserving the benefit of losses where they should fall. 

The important point is that in going the sub-fund route there is no specific hold-over rule.  In practical terms therefore unless the assets concerned are standing at a loss or hold-over relief is due, whether under s 165 or under s 260, it may only be in the case of new settlements where there is no immediate CGT costs that an election is likely.

(Andy Richens, Tax Technical Director of Bishop Fleming)

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